The prospect of global foreign direct investment (FDI) looks gloomy for the current calendar year. Two world bodies have already made it clear that 2016 will ultimately experience lower inflow of FDI across the world.
The United Nations Conference on Trade and Development (UNCTAD), in its Global Investment Prospects Assessment: 2016-2018, projects that flow of global FDI may decline by 10-15 per cent in the current calendar year.
On the other hand, the Organisation for Economic and Cooperation Development (OECD) said that global FDI dropped by 5.0 per cent in the first half of the current calendar year. According to its statistics, global FDI stood at $793 million in January-June period of 2016. The amount is around 44 per cent of last year's total FDI.
To assess the FDI prospects at the global level, it is important to understand the prospects of global economy and global trade. The International Monetary Fund (IMF) in its latest World Economic Outlook last October projected that the world economy would grow by 3.1 per cent in the current year. It attributed this to the Brexit and slowdown in the US economy. On the other hand, the World Trade Organisation (WTO) in its latest forecast in September last mentioned that world trade would grow by 1.7 per cent in the current year. This is for the first time in last 15 years that the growth rate of global trade falls below the rate of economic growth. The WTO earlier projected 2.8 per cent growth but cut it down mainly due to slowdown in China and fall of imports in the United States (US).
Against this backdrop, the UNCTAD's projection appears realistic. The UN body released its assessment report last month where four major factors are identified for possible decline in global FDI. The UNCTAD argued that persistent weakness of aggregate demand, sluggish growth in some commodity exporting countries, effective policy measures to curb tax inversion deals and a slump in multinational enterprises (MNE) profits in 2015 are major factors to cause the slowdown in global FDI which posted 38 per cent growth in 2015.
In 2015, total inflows of global FDI stood at $1762 billion ($1.76 trillion) while the amount was $1277 billion in 2014. The UNCTAD projected that FDI in the current year may hover between $1500 billion and $1590 billion. But the world body is optimistic on medium-term prospects and said, "Over the medium term, global FDI flows are projected to resume growth in 2017 and surpass $1.8 trillion in 2018, but they will remain below the pre-crisis peak."
The UN body was of the view that FDI prospects 'remain muted' in most regions while its inflows to Africa are 'likely to return to a growth path' due to liberalisation measures and planned privatisation.
On region-wise projection, it mentioned that inflows of FDI to developing Asia would decline by about 15 per cent while Latin America and the Caribbean might also see their slowdown further but transition economies are expected to experience modest increase in 2016. It put special attention on six mega-groupings and said that FDI flows to G20 members could decline by 5 to 10 per cent in 2016, falling to $830-880 billion level. The Asia Pacific Economic Cooperation (APEC) would face the biggest decline by 15 to 20 per cent to $760-810 billion while flows to Brazil-Russia-India-China-South Africa or BRICS countries could increase by around 10 per cent to $270-290 billion.
The UNCTAD termed the expectations about short-term FDI flows 'mildly pessimistic' as it will decline in both developing and developed economies.
Besides the UNCTAD, the OECD also shed light on global FDI. In its latest report, released in the first week of November, it showed that FDI flows rose to $513 billion in the first quarter 'due to large flows in the United States and, to a lesser extent, in the United Kingdom after Royal Dutch Shell bought British Gas.' It also showed that in the first half of 2016, FDI flows into the OECD area increased by 14 per cent to $568 billion which was $499 billion in the same period of 2015.
The OECD, the organisation of 35 developed countries, also mentioned that FDI outflows from OECD regions, dropped by 16 $515 billion during the period under review.
It is to be noted that though both the global inward and outward FDI should be equal, in reality, some statistical discrepancies are there. Thus, unless otherwise specified, references to 'global FDI flows' mean the average of these two figures.
PROSPECT FOR BANGLADESH: Bangladesh is also not beyond the global trend. During the first half (January-June) of the current calendar year (2016), net inflow of FDI dropped by 24 per cent from the last half (July-December) of the previous year (2015) and by 21 per cent from the first half of the previous year.
The latest statistics, available with the Bangladesh Bank, however, revealed that inflow of FDI slightly increased in July-September period of the current year. Nevertheless, FDI in nine months (January-September) in the current year was 10 per cent lower than that of the last year. If the trend continued for the rest of the year, annual amount of FDI will not cross the last year's amount which was $2.23 billion. On fiscal year (July-June) count, net inflow of FDI was $2.01 billion in the last fiscal year (FY16).
In fact, FDI in the country is still very low and currently well below the target set in the five-year plan document. The Seventh Five Year Plan (7FYP) projects $2.58 billion FDI for the last fiscal year while the actual flow was around 23 per cent lower than the target. During FY11-15 period, average annual FDI inflow was $1.36 billion while 6FYP document set $1.23 billion as average annual inflow. But, 7FYP set $6 billion annual average inflow of FDI. While the target for the first year is missed, it is also very unlikely that $4.31 billion target for the second year (FY17) will be achieved.
One major disappointing aspect is non-realisation of greenfield FDIs. Though value of greenfield FDI doubled last year to $4.49 billion against 22 projects, announced by the multinational enterprises (MNEs) in Bangladesh, most of the projects are yet to take off. Greenfield FDI in 2014 was $2.05 billion against 28 announced projects. Greenfield investment is a form of FDI where a 'parent company builds its operations in a foreign country from the ground up.' In addition to construction of new production facilities, these projects may include building of new distribution hubs, offices and living quarters.
Moreover, July 01 terrorist incidents in Gulshan came as a big blow to the country's investment destination potential. Coupled with existing problem of land, infrastructure and corruption, latest threat of terror emerged as another major obstacle to FDI flow to the country.
The World Bank Doing Business Index 2017, published last month, also indicates that attracting quality FDI is a big challenge for Bangladesh. A country, where starting a new business becomes costlier and paying tax becomes more difficult, can hardly expect to attract higher and better foreign investment in the long-run.
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